Canyon pushes Ensco to raise bid, stating “flawed sales process”

(Reuters) – Hedge fund Canyon Capital Advisors has warned it would vote against the $2.38 billion sale of offshore driller Rowan Companies Plc to rival Ensco Plc, casting doubt on a combination that had signaled optimism about the future of offshore exploration.

U.S. crude oil prices CLc1 have plunged by more than 30 percent since the deal was announced in early October, making offshore assets less attractive. At the time, oil was trading around $75 a barrel, a level that helps ensure profitability of expensive deep-water drilling projects.

Canyon holds a 6.3 percent stake in Houston-based Rowan, valued at more than $80 million, making it one of Rowan’s largest shareholders.

Shares of Rowan were up 7.8 percent at $10.24 in mid-day trading, while shares of Ensco were up 7 percent at $4.48. Rowan’s shares have fallen by roughly 50 percent since the deal was announced.

In a Jan. 4 letter to Rowan’s board that was released on Monday, Canyon outlined several reasons for opposing the merger, including Ensco’s high debt and its older fleet of drill-ships that are geared toward deep-water projects. The hedge fund also said the deal undervalued Rowan and that the merger was the result of a “flawed sales process.”

“Not only was the proposed transaction unfavorable to Rowan at the time the deal was struck, but subsequent market developments – including the significant fall in Brent crude prices amid global economic and geopolitical uncertainty – have made it even less favorable in our opinion,” Canyon wrote in the letter.

The recent drop in oil prices has thrown other previously announced energy deals into question. Last week private equity firm ArcLight Capital Partners lowered its offer price for pipeline company American Midstream Partners to $4.50 per common unit from $6.10.

Ensco holds more than $5 billion in long-term debt, twice as much as Rowan, with nearer-term maturities and less available cash, adding risk to Rowan shareholders, Canyon said in its letter.

Rowan said the combination would create a “uniquely positioned offshore drilling company with capabilities across all water depths.”

“We are confident that this transaction is the best way to maximize value for all Rowan shareholders,” a company spokesman added.

Rating firm Moody’s Investors Service last month said the risk of downgrades remains elevated for offshore drillers, including Ensco and Rowan, as they face significant contract expirations, weakening earnings and increased financial leverage through 2019.

Ensco in turn released this announcement today (Final Proposal):

Ensco plc announced today that it has made a proposal to Rowan Companies plc to increase the exchange ratio for its all-stock combination with Rowan.

Under the terms of the proposal, Rowan shareholders would receive 2.600 Ensco shares for each Rowan share, a 17.4% increase from the exchange ratio of 2.215 contemplated by the transaction agreement dated October 7, 2018 between the parties. Upon closing, Ensco and Rowan shareholders would own approximately 57% and 43%, respectively, of the outstanding shares of the combined company. All other terms and conditions of the transaction agreement would remain unchanged. The proposal has been unanimously approved by Ensco’s board of directors.

Ensco’s Non-Executive Chairman of the board of directors Paul E. Rowsey III stated, “This enhanced proposal is a reaffirmation of our belief that this combination will generate significant long-term shareholder value and result in the creation of a leading offshore driller with substantial opportunities across water depths, geographies and market conditions. The combined company will boast some of the industry’s highest-specification assets, unparalleled geographic coverage, a diverse customer base and significant future revenue growth opportunities. Further, $150 million of anticipated annual synergies resulting from the transaction are expected to create $1 billion of capitalized value for shareholders of the combined company. We look forward to quickly executing an amendment to the definitive agreement and to consummating this transaction and delivering on the significant opportunities of the combined company.”

In addition to a leading offshore fleet with a vast geographic presence, the combined company will have the industry’s broadest customer base, with continued focus on customer satisfaction and the development of new technology to differentiate services and lower costs. As a result of significant synergies, the transaction is expected to be accretive to cash flow per share in 2020. The combined company would also have a strong financial position with $3.7 billion of total liquidity, $2.6 billion of contracted revenue backlog and an enhanced credit profile that enables the combined company to better compete across market cycles¹.

Ensco’s Board and senior management team are committed to the combination of the two companies, which will benefit shareholders, customers and employees of both companies. However, this proposal is final and represents the maximum exchange ratio that Ensco is prepared to offer.

Ensco’s Press Release Here

Photo used under the Creative CommonsAttribution-Share Alike 3.0 Unported license. Author: CellsDeDells

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